Economic Reality Test
The Economic Reality Test is the legal standard the IRS, US Department of Labor, and most state labor agencies use to determine whether a worker is truly an independent contractor or legally an employee - based on the totality of the working relationship, not the label in the contract.
The test weighs behavioral control (does the company control how the work is done, or only the result?), financial control (who bears the investment and profit/loss risk?), and the relationship's permanence and integration into the business. Calling someone a contractor in a written agreement does not make them one if the actual working relationship looks like employment.
For the full breakdown of when this risk becomes material, see How to Manage Remote Contractors vs Full-Time Remote Employees.